Foreclosures and short sales are on the rise in this difficult real estate market. But all of these changes can leave neighbors wondering, “What about the value of my home?” Owners of surrounding homes are concerned that a foreclosure might affect the market value of their home.


It is important to know that appraisals include comparable sales, plus foreclosures. Property appraisals are based on three approaches:


•Cost approach. This is the value to build the home, plus the value of the land.

•Income approach. This is rarely used for single family homes and is used to compare multiple units, based on capitalization rates.

•Market value approach. This type of appraisal compares the subject property to three comparable sales in the neighborhood.


If two comparable sales are regular transactions and one is a foreclosure or short sale, will the appraiser use that distressed sale as a comparable property?  These are considered sales at market value, offered for sale by a willing seller and purchased by an able and willing buyer, with neither party under duress. Banks and mortgage companies are currently being very conservative in their lending practices, including the amount of money they are willing to lend on a property. They look very closely at the appraised value given a property, sometimes asking for a second appraisal in order to feel comfortable about the value given. And, they require that all sales in the area be included in the determination of value.

The good news is that after experiencing a large inventory of unsold homes many areas are beginning to see prices are beginning to rise. Buyers are taking advantage of the large variety of affordable homes, government tax breaks, and low interest rates and we are starting to see some stabilizing of home prices.